The literature on market segmentation and its various aspects - Essay Example

Market Segmentation Strategy – Literature Review and its Application We are living in a global village. With the advancements in the fields of science and technology, the world is getting closer and closer and this fact is impacting the business world too. As a result of globalization, the customer base of the organizations is also increasing, leading to more diversification, especially in terms of their needs regarding specific products. This situation made the marketers develop a strategy that we call segmentation. This report is intended to review the literature on market segmentation and its various aspects. Moving further, we would analyze the implementation of segmentation strategy at ABC Insurance Company and compare it with the Literature.. LITERATURE REVIEW ON MARKET SEGMENTATION: What is Segmentation? The literal meaning of segmentation is to divide into pieces. It is often taken in the context of classifying the things into different groups so that all the objects in one group are identical to one another, sharing a common profile and on the basis of those factors, are different from other segments. to divide the population into homogeneous groups according to product, user or purchase situation characteristics herkules.oulu.fi/isbn9514259378/html/g240.html This analogy has been borrowed by marketers in the same context. In the field of marketing, market segmentation is the process of dividing the market into similar groups such that individuals/businesses within each group share common characteristics. Used for: Profiling, Trade Area Analysis www.mappinganalytics.com/glossary/glossary.html Segmentation is the process of partitioning markets into groups of potential customers with similar needs and/or characteristics who are likely to exhibit similar purchase behavior. www.dmreview.com/rg/resources/glossary.cfm Market segmentation is a marketing approach that encompasses the identification of different groups of customers with different needs or responses to marketing activity. The market segmentation process also considers which of these segments to target. www.stile.coventry.ac.uk/cbs/staff/beech/BOTM/Glossary.htm Market segmentation is the segmentation of markets into homogenous groups of customers, each of them reacting differently to promotion, communication, pricing and other variables of the marketing mix. Market segments should be formed in that way that differences between buyers within each segment are as small as possible. Thus, every segment can be addressed with an individually targeted marketing mix. (Bennette 1998) “One of the most important strategic concepts contributed by the marketing discipline to business firms and other types of organizations is that of market segmentation” (Myers, 1996). Market Segmentation is considered and propagated by the marketing gurus as yet another step ahead of the previous ones in order to make the marketing plans and their implementation more effective and efficient in terms of its productivity. It is considered by them as a newer development in the domains of marketing research. Why Segmentation? There are a number of reasons to do market segmentation. Few of them, as available in literature, are stated below: Better serving customers needs and wants The foremost advantage of segmentation is that it helps to serve the customers’ needs and wants in a more effective manner. .(Aker 1991) Higher Profits As a result of segmentation, due to development of of separate strategies for each of the segment, the organization would be catering greater number of customers in each segment than what it had been serving for each segment without segmentation. This would lead to higher profits. (Asael 1987) Opportunities for Growth The organization can grow in terms of its volume of sales as well as customer base. Sustainable customer relationships in all phases of customer life cycle As a result of the customized strategies for each segment, a Sustainable customer relationship in all phases of customer life cycle is possible. Targeted communication The communication to each segment would be designed keeping in view the profile of that segment and the factors that would appeal that particular segment. Stimulating Innovation As there is to be made a separate strategy for each of the segment, the profile is more unified for them; therefore, the marketing strategists have a better situation and more space for innovation and creativity. (Cateora, 1993) Higher Market Shares As a result of segmentation, due to development of of separate strategies for each of the segment, the organization would be catering greater number of customers in each segment than what it had been serving for each segment without segmentation. Is it beneficial or not? The Journal of Marketing in July 1956 has made a remarkable comparison between market segmentation and product differentiation. He recognizes market segmentation as one of the most important contribution of the strategic management of the organization. (Biggadike, 1981) However, the picture is not all favoring; there are some critics on the limited scope and impact of the market segmentation as well. Some scholars do cite the limited validity of the idea of market segmentation in practical application. (Wright, 1996). It is suggested by Dickson and Ginter that there is the possibility in real life that there may be two firms competing with each other yet they have different market segments altogether. There are a number of factors that do influence the process of making segments, and thus, as they argue, the approach to make segments may also vary, leading to two different market segments by two competitors in same market. The issue discussed by Dickson and Ginter is not the only shortcoming that highlights when it comes to the implementation of the notion of market segmentation in the practical sphere of business world. How to do segmentation? Even before Dickson and Ginter, it was Wind (1978) who has highlighted the issues related to market segmentation. His review was very comprehensive and like any standard research, it included research design considerations, data collection approaches, data analysis procedures and data interpretation and implementation. As the model of segmentation follows a bit different kind of guideline therefore, Wind has set certain guidelines for its research design. Like, 1. What unit of analysis should be employed (like, per household, per city, per store or buying location) 2. How should the variables be defined operationally? 3. What is the most appropriate sample design? 4. How reliable are the data and how should one treat unreliable data? 5. How stable are the segments over time? 6. How homogenous are the segments? 7. How segmentable is the market? 8. How can the results of a segmentation study be validated? 9. What are the cost considerations in the design of a segmentation study? There are a number of types and approached of target marketing. Not all of these types are equally applicable in all circumstances. In “Small Business Usage of Target Marketing”, Peterson has specified and examined so as to ascertain the extent to which the segmentation strategy can be employed by small businesses and what approaches would be handy for the managers of those firms. This inference has been based on the data Peterson has acquired. He drafted the mail questionnaire and sent it to the directors of almost 50 business schools, which were randomly selected. Each director then dispersed 40 questionnaires to their present and past client. In total, the sample size was 519, including 316 small retailers, 127 small service enterprises, 42 small manufacturers, 22 small wholesalers, 12 other small firms. Around 62% of the respondents replied positive when they were asked if they do employ a target market strategy. It was then highlighted through statistical analysis that those who had employed the target market strategy have nearly twice the Return on Investment (18% almost) than that of those who do not apply this strategy (9.3%). As it is quite obvious that the ROI is not the result of marketing strategy only, thus on the basis of higher ROI only, one can not predict the effectiveness of market segmentation in the strategic management. (Peterson, 1991). In the same study, the respondents who used target marketing were asked about their methods of segmentation. Few of the commonly employed methods were geographic, demographic and the benefits sought or desired. They were also inquired, in the same study, about their level of satisfaction to the market segmentation methods that they employ, on a scale of 1 to 5. It was highlighted from this rating that their level of satisfaction from their existing segmentation methods is substantial. In fact, many of the highly and commonly used methods were given the high scores for the scale of satisfaction. (Peterson, 1991) However, the high level of satisfaction does not suggest the effectiveness of the market segmentation strategy, though it is one of the indicators for that. One of the remarkable frameworks for the implementation of the market segmentation strategy is that provided by Roger. He proposes the idea of need based segmentation, in a gradual and step by step manner. There are a number of advantages of the need based segmentation. First and foremost is that such segmentation would be focused on the customer’s need and thus would be more aligned to the marketing plans and strategies. The primary purpose is to identify the demographics and behaviors that prove to be the distinguishing factors among various segments so as to make it possible to classify the segments on the basis of need. (Best, 2004) Described below are the steps mentioned by Best for the process of need based segmentation. The first step is the need based segmentation. In this step, the marketers classify the customers into various segments on the basis of related or similar needs as well as benefits sought by the customer for a particular consumption. For example, those customers who prefer to fast food when they are hungry from those who prefer to have a proper lunch. The next step is the identification of the segments. This step involves the brain storming and developing an ideal or common profile for each of the segment previously identified. This profile may include distinct features like life style and usage behavior etc. The basic idea behind this step is to identify those behaviors and variables which make each segment distinct and identifiable from another. The third step, as mentioned by Best, is the assessment of the attractiveness of each segment. In this step, the marketer is supposed to identify the criteria of attractiveness of each segmentation as well as the level of attraction of each one. The next step is to determine that to what level are these segments profitable. This step would help to identify the net marketing contribution of each segment. The next step is the segment positioning. Once the segment is created, the value propositions and other key characterterstics need to be identified for each segment separately. If the same proposition would be used for all the segments, this would mean that the entire efforts made so far were of no use. Thus, it is required that the marketer should develop unique value proposition for each segment keeping in view its ideal profile developed in the earlier stage. After doing this, we need to perform the acid test for each segment. This means to develop the segment storyboard and then test the attractiveness of each segment’s value proposition. Once this is done, marketing mix strategy is developed. This is done by expanding the segmentation strategy and including all the required aspects such as price, product, promotion and place, the 4 Ps of marketing. (Source: Best, Roger J. Market-Based Management. 3rd ed, 2004) What are the types of segmentation? Like many of the marketing operations, the factors used to classify the audience into different segments also vary for the business consumers as that for the individual ones. The factors used for the segmentation of the individual customers are as follows: (Souza et. al 1997; Oh and Jeong 1996; Karla and Goodstein 1998, Couper and Inoe 1996; Bucklin and Siddhart 1998) Demographics: The demographics include: Age Sex Family Race Religion Family Life Style For example, the cosmetic or shampoo developer will segment according to the gender. Socio Economics Income Occupation Education Social Class For example, the car manufacturer may consider the income as the basis for segmentation. Geographic: Country Region Type of Urban Area Type of Housing For example, a car rental company may segment geographically. Personality and Life Styles: Aggressive Energetic Pessimist Happy-go-Lucky For example, energetic people would be more attracted towards rock music. Purchase Behaviors: Brand Loyal Store Loyal Package attraction etc. Price Conscious Status Conscious Conform Conscious Appearance Conscious For example, if the person is status conscious, the company will design the product that will align with his status and can become the status symbol and project the product in the same way. Purchase Occasions: Regular Purchase Emergency Purchase Seasonal Purchase etc. For seasonal purchases, the ads would be also seasonal. Benefits Sought: For example, in case of shampoo, Some would like to seek benefits like dandruff removal, strengthening hairs, shining hairs etc. Consumption Behavior and User Status: Light consumers Hard Core Consumers Occasional Consumers etc. Attitude to Products: Whether customer consider the product as necessity, luxury or comfort, is analyzed. We started our discussion from the literal meanings of the term segmentation. Moving further, we discussed the technical meaning of the term. Then we reviewed the literature both in favor and against of the segmentation. Afterwards, we looked into the need for segmentation and how it is done. Let us now discuss the implementation of the segmentation strategy in the insurance industry. MARKET SEGMENTATION IN INSURANCE INDUSTRY The insurance industry is a major portion of the financial sector of most of the nations of the world, nationally as well as internationally. The ABC Insurance company is an important player of the insurance industry of our country. The segmentation in the insurance industry is perhaps one of the most complexes as well as diversified one. It is a hybrid model where multiple segmentations are done simultaneously. Let us look at the various types of segmentations and accordingly devised marketing strategies by the ABC Insurance Company. Before looking into the segmentation, let us look at the possibilities and the scope of segmentation in the insurance industry. As we all know that what the insurance sales representative sells is not the product, rather something intangible. They sell basically a contract that on the contingency of happening of such and such event, you will be compensated in so and so manner. The first and fore most segmentation in on the nature of the customer, whether he is an individual one or the corporate one. The individual customers, as the name indicates, are the ones who purchase the insurance policy on their own, whereas, the corporate clients are actually the organization who are sold the insurance policy for a large number of people. As we all know that the requirements of the individual as well as the industrial consumer do vary significantly so should the services rendered to them as well. For the products designed for the individuals, the profile and demographics of the individual does matter a lot, specially the income of the individual along with the risk associated with his occupation and his current health status. However, in the case of corporate client, what really matters is the number of employees in that organization. In individual case, usually a number of health tests are conducted, if the coverage provided is too large. However, in the case of the corporation, the employees are not individually tested. Moreover, the package is standard for all employees. In the case of individual, it is possible that one person is given the family income benefit while the other one may elect for pension plan and so. So far as the marketing strategy is concerned, the plans devised for the individuals have more focus on the individual needs that should be fulfilled in case of his death, such as the education of the children, bearing expenditures of their children’s education etc. However, the marketing strategy for the corporate products is entirely different. The marketing of corporate products is more focused in realizing the people (organizations) how, with the same or lower total premium as compared to that for other companies, they can provide more benefits to their employees. The plans for the corporate players need to be more precise, cost effective and rewarding, in order to gain the reasonable share of the corporate market. The rational appeal must be there for this segment. The emotional appeal would work more for the individual customers. Another segmentation on the demographic basis is on the basis of family life cycle. Those who are married are targeted on the basis of the future need of their educations, the arrangement for funds in case of their death etc. This is therefore, one segment. Another segment is that of those fresh graduates who have just been into jobs or are willing to marry soon. They are targeted on the basis of the need to save money for future in order to secure your dreams and the secure your existing family (parents etc.) which may be dependent on you. There is also a socioeconomic basis of segmentation. The social class that the sales representative of this category segment out from whole and target is from lower upper class to upper higher class. Another basis of Segmentation among the individual consumers is on the basis of some demographic factors such as income. The insurance agents are well known for making tailor made plans for each person. The major factor that they use for the segmentation on demographic basis is income. Usually, people above 800$ per month are considered the target audience. Out of them, people earning more than 800$ but less than 1200$ are usually considered for and marketed for the plans with small contribution per month, such as the Accidental Plan. Another division is the geographic basis of segmentation on the basis of very idea that ‘same feather gathers together’. It is therefore the belief of ABC Insurance Company that same area people will have more or less same social class and therefore more or less same level of strategies would be required. This is why, ABC insurance company assigns its workforce on the geographic basis. It is done so that each sales representative may become able to identify the ideal profile of the people living in his assigned area and thus develop his marketing strategies and his product’s unique selling proportion on this basis of the fact that what attracts the people of that area. Will they be attracted by the idea of saving or future security and so on. These are few of the bases for the segmentation of the customers of the ABC Insurance Company. Now let us look that to what extent the steps of segmentation mentioned in the literature (Best, 2004) are being followed here. Classification: the customers with same trends are put into one class. (this step is more or less similar to the need based segmentation) Development of the Ideal Profile for each segment: The segment identification step mentioned in the literature is quite similar to this one where the common features of the people in each segment are identified. Does the segment worth attention? In this step the marketers try to find out whether the segment is really worth investing or not? To what extent, it may payout. This step is the combination of ‘Assess Segment Attractiveness’ and ‘Evaluate Segment Profitability’. As best identified, the next step is to position the product by determining the unique value proportion of that product, keeping in view the profile of that segment. Segment Acid Test, as mentioned by Best is not performed by ABC Insurance Corporation Market Mix Strategy is then defined and expanded in terms of four Ps. So we can say that all except one steps mentioned by Best are being followed by ABC Corporation for the purpose of segmentation. Is segmentation beneficial for ABC Insurance or not? The scholarly circle seems to be divided in terms of their opinions regarding the benefits of market segmentation and its implementation in the practical world. However, if we look at the case of the ABC Insurance Corp. we find the segmentation strategy extremely useful. Had the segmentation strategy not been there and a single marketing plan would have been applied there, the consequences would have as follows: Lesser market shares Lesser customer loyalty Lesser Profit Margins Inability to cater large audience with diversified needs Lesser room for innovation Conclusion: To sum up, we first started with the review of literature regarding segmentation and then analyzed the segmentation strategy at ABC Insurance Company and analyzed on what bases do they segment and how do they segment and then compared it with the literature. We also looked into the possibilities without segmentation for the ABC Insurance Company and found that without segmentation, the company would have been no way competitive and able to cater the diverse needs of its customer base, with proper segmentation. Thus we can conclude that segmentation is very essential in modern times keeping in view the rapidly changing and expanding business environment, however the segmentation needs to be effective and carefully planned, otherwise, the sales would decline and get even worse than what it had been without segmentation. Bibliography Biggadike, R.E.1981“The Contributions of Marketing to Strategic Management.” The Academy of Management Review Wright, Malcom. 1996 “The Dubious Assumptions of Segmentation and Targeting.” Managemen Decision Dickson, P.R. and J.L. Ginter. (1987) “Market Segmentation, Product Differentiation, and Marketing Strategy.” Journal of Marketing Wind, Yoram. 1978 “Issues and Advances in Segmentation Research.” Journal of Marketing Research, XV Peterson, R.T.1991 “Small Business Usage of Target Marketing.” Journal of Small Business Management Best, R.J. 2004 Market Based Management: Strategies for Growing Customer Value and Profitability. 3 ed. 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